Wall Street/Main Street Divide Nothing New

Income inequality, financial panics, economic downturns, and ongoing anxiety about banking institution stability. Sound familiar? As in ripped-from-the-headlines in 2008? As Professor David Weiman explained during a presentation to alumnae volunteers during the 2013 fall Leadership Assembly, there’s historical precedent for recent financial unease.

“The issues…really resonate and help us understand some of the political and economic divides that are recurrent themes that have plagued the U.S. political economy from its origins,” said Weiman in his lecture, “Wall Street v. Main Street in Historical Perspective: The Panic of 1907.” He added, “What goes around comes around.”

Even worries about income inequality underscore the inherent conflict between the financial interests of Wall Street and the realities of Main Street today. “There’s been significant growth in the relative size of Wall Street and an increase in inequality,” said Weiman, who is the Alena Wels Hirschorn ’58 Professor of Economics and who specializes in 19th- and 20th-century American economic history. “Inequality is at a historic peak. The vulnerability of Main Street, where there is the production of goods and services, to financial speculation [on Wall Street]” is rooted in the “peculiar history of the American banking system. It’s highly fragmented by design.
All roads lead to New York, in the ways in which money moves across the country.”

From the republic’s beginnings, there has been tension between federal and state responsibilities, and between the public and private spheres. In the country’s early days, banks formed central clearing houses on their own in major cities. Until 1863, when the National Banking Act included a provision to create a system of national banks, there wasn’t even a common national currency. “Debate about the role of a central bank in a modern developed economy has been ongoing,” said Weiman. “It’s not whether a country needs a monetary authority, it’s a question of what kind of authority.” Before the development of central banks, banks would limit their depositors’ withdrawals from their accounts during a crisis.

The significance of the 1907 panic was that it triggered a reform movement that led to the Federal Reserve Act of 1913. That 1907 panic was precipitated by a run on the Knickerbocker Trust, which served as a trust company for wealthy individuals, estates, and corporations. Denied assistance by the major New York banks, Knickerbocker Trust could not honor deposit funds. Weiman added that some bankers in 2008 noted the similarities between the Knickerbocker Trust—a non-bank that operated like a bank—and Lehman Brothers. “Bankers didn’t like these shadow banks,” he said.    

In response to a question from the audience about the possibility of another financial crisis, Weiman replied, “I don’t think the Fed will stop the stimulus. They’re taking a reactive policy.” He added, “You need a credible regulatory authority. You need centralizing authorities that actually make the system more efficient, but you need to be flexible and adjust to changing circumstances.”

In response to other audience questions, however, Weiman would not provide soothing reassurances about the future financial picture. Although optimistic about the confirmation of Janet Yellen as the next head of the Federal Reserve, he pointed out that Congress remains stalemated about enacting policies to complement the stimulus, such as continuation of benefits for the long-term unemployed, and public investments in infrastructure. The financial system needs effective structural reform to insulate the banking-financial sector from the excesses that toppled it in 2008.

For volunteer alumnae leaders who attended the session, Weiman’s provocative discussion was a welcome immersion in the intellectual life of the campus. “The faculty lecture is always a highlight of the Leadership Assembly because it, more than any other part of the program, is a gift from the College to the alumnae who attend,” said Nicole Vianna ’81, the event’s chair. “It’s an opportunity to learn something new and helps us reconnect to the intellectual excitement we experienced at Barnard—without a paper or final hanging over our heads. I was especially happy that Professor Weiman could join us because his research interests are so relevant to current events and his lecture style is engaging and accessible even to those who never studied economics or finance.”

Added Linda Sweet ’63, “Professor Weiman connects the past to the present and takes a seemingly esoteric subject and makes it relevant to today. In fact, he spoke about the origins of the Federal Reserve Bank in his presentation, and then I heard him on the radio a few days later talking about Janet Yellen. Exactly what I expect of a Barnard professor.”